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DIGITAL RIVER, INC.
395,992 SHARES
COMMON STOCK
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THE SELLING STOCKHOLDERS: The selling stockholders identified in this prospectus are
selling 395,992 shares of our common stock. We are not selling
any shares of our common stock under this prospectus and will not
receive any of the proceeds from the sale of shares by the
selling stockholders.
OFFERING PRICE: The selling stockholders may sell the shares of common stock
described in this prospectus in a number of different ways and at
varying prices. We provide more information about how they may
sell their shares in the section titled "Plan of Distribution" on
page 4.
TRADING MARKET: Our common stock is listed on the Nasdaq National Market under
the symbol "DRIV." On November 4, 1999, the closing sale price of
our common stock, as reported on the Nasdaq National Market, was
$25.4375.
RISKS: Investing in our common stock involves a high degree of risk. See
"Risk Factors" beginning on page 4.
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The shares offered or sold under this prospectus have not been approved by
the Securities and Exchange Commission or any state securities commission, nor
have these organizations determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 5, 1999
Digital River is our registered trademark and a registration application is
pending for CommerceBridge All other trademarks or service marks appearing in
this prospectus are the property of their respective owners.
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PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF OUR BUSINESS. YOU SHOULD CAREFULLY READ THE
SECTION ENTITLED "RISK FACTORS" IN THIS PROSPECTUS AND OUR ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1998 FOR MORE INFORMATION ON OUR BUSINESS
AND THE RISKS INVOLVED IN INVESTING IN OUR STOCK.
IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED IN THIS PROSPECTUS, THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE EXCHANGE ACT OF 1934. THESE
STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS "EXPECTS,"
"ANTICIPATES," "INTENDS," "PLANS" AND SIMILAR EXPRESSIONS. THE OUTCOME OF THE
EVENTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS IS SUBJECT TO RISKS AND
ACTUAL RESULTS COULD DIFFER MATERIALLY. THE SECTIONS ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 4 OF THIS PROSPECTUS, AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" IN OUR
ANNUAL REPORT CONTAIN A DISCUSSION OF SOME OF THE FACTORS THAT COULD CONTRIBUTE
TO THOSE DIFFERENCES.
DIGITAL RIVER
We are a leading provider of comprehensive electronic commerce outsourcing
solutions to software publishers and online retailers. We have developed a
technology platform that allows us to provide a suite of electronic commerce
services to our software publisher and online retailer clients, including
electronic software delivery, or ESD. We also provide data mining and
merchandising services to assist clients in increasing Internet traffic and
sales through their Web stores. We have no branded Web store that would compete
with our clients. Instead, we provide an outsourcing solution that allows
clients to promote their own brands while leveraging our investment in
infrastructure and technology.
As of September 30, 1999, we maintained a database of more than 100,000
software products from our various software publisher clients, including more
than 30,000 software titles and more than 70,000 digital images, such as
photography, clip art and type fonts. Through September 30, 1999, we had
completed transactions for more than 2.0 million unique end-users including
users from our recent acquisitions.
Our proprietary commerce network server, or CNS technology provides the
platform for our solutions. The CNS incorporates custom software applications
that enable ESD, Web store authoring, fraud prevention, export control,
merchandising programs and online registration. The CNS also features our
database of more than 100,000 software products. Using our CNS platform, we
create Web stores for our clients that replicate the look and feel of each
client's Web site. End-users enter the client Web site and are then seamlessly
transferred to our system. End-users can then browse for products and make
purchases online. Once purchases are made, we deliver the purchased software
products directly to the end-user, primarily through ESD. We also provide
transaction processing services, and collect and maintain critical information
about end-users. Our clients can use this information to facilitate add-on or
upgrade sales and for other direct marketing purposes. We actively manage direct
marketing campaigns for our clients, and deliver purchase information and Web
store traffic statistics to our clients on a regular basis.
We believe that the market for online software sales will continue to grow
rapidly. International Data Corporation estimates that the worldwide market for
ESD will increase from approximately $200 million in 1997 to approximately $5.9
billion by 2001, a 133% compound annual growth rate. The Internet is well-suited
for most software distribution because software products can be purchased and
delivered quickly, conveniently and cost-effectively to an end-user's home or
office computer through ESD. However, software applications exceeding 10
megabytes can be impractical to download at slower modem speeds. We believe that
as Internet bandwidth increases, ESD will become increasingly attractive even
for large software. Accordingly, we believe that ESD will represent an
increasing share of online software sales and will become increasingly critical
to online retailers' success. Unlike established physical distribution channels
for shrink-wrapped software, until recently there has been no
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established, comprehensive electronic distribution source for online retailers.
We believe that the distribution of software products through ESD is complex and
requires up-front and ongoing investments in secure, reliable and scaleable
systems. Accordingly, we believe that a substantial market opportunity exists
for a comprehensive, cost-effective, outsourced electronic commerce solution
that provides software publishers and online retailers with access to a critical
mass of software products and a robust distribution and transaction network.
To extend our e-commerce outsourcing capabilities, in the second quarter of
1999, we began offering CommerceBridge, a Web-enabled commerce management
service for all types of businesses. Using our infrastructure for Web store
hosting, order and transaction processing and data center management,
CommerceBridge acts as a "hub" that custom manages and processes inbound
customer orders for clients using this service. CommerceBridge then communicates
these orders to the appropriate client, who is responsible for actually filling
the orders. This service provides companies with the ability to outsource their
entire Web commerce process rather than investing financial and management
resources in developing their own internal e-commerce systems.
Digital River was incorporated in Minnesota in February 1994 and
reincorporated into Delaware in December 1997. References in the prospectus to
"Digital River," "we," "our," "us" and the "Company" refer to Digital
River, Inc., a Delaware corporation and its subsidiaries. Our executive offices
are located at 9625 West 76th Street, Suite 150, Eden Prairie, Minnesota 55344.
Our telephone number is (612) 253-1234. Information contained on our Web site
does not constitute part of this prospectus.
RECENT DEVELOPMENTS
On October 7, 1999, pursuant to an Asset Purchase Agreement dated
October 7, 1999 by and among Digital River, Walnut Creek CDROM, Inc., a
California corporation, and Robert Bruce, the sole shareholder of Walnut Creek,
we purchased those assets of Walnut Creek related to its business of providing
Internet downloads of its Windows and DOS-based software library, including the
simtel.net archives. In exchange for these assets, we made a cash payment to
Walnut Creek of $1.0 million and issued to Walnut Creek 143,885 shares of our
common stock.
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RISK FACTORS
Investing in our common stock is involves a high degree of risk. You should
be able to bear a complete loss of your investment. You should carefully
consider the following factors, in addition to the other information in this
prospectus, before investing in our stock.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE ARE ENCOUNTERING NUMEROUS RISKS
THAT WE MAY FAIL TO SUCCESSFULLY ADDRESS
We have a limited operating history. We were incorporated in February 1994
and were considered a development stage company through August 1996. We
conducted our first online sale through a client's Web store in August 1996, and
we are still in the early stages of development. Our business and prospects must
be considered in light of the risks encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets such as electronic commerce. Some of these risks relate to our ability
to:
- maintain or develop relationships with software and shareware publishers
and online retailers;
- execute our business and marketing strategy;
- continue to develop and upgrade our technology and transaction-processing
systems;
- provide superior customer service and order fulfillment;
- respond to competitive developments; and
- retain and motivate qualified personnel.
We may not be successful in addressing these risks, and if we are not
successful, our business will suffer. Our current and future expense levels are
based largely on our planned operations and our estimates of future sales. It is
difficult, however, for us to accurately forecast future sales, because our
business is still new and our market is still developing. We may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. As a result, any significant shortfall in sales would immediately
harm our business. As a result of our rapidly evolving business and our limited
operating history, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful and investors should not rely upon our
historical results as an indication of future performance.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT OUR LOSSES TO CONTINUE FOR THE
FORESEEABLE FUTURE
We have incurred significant losses since we were formed. As of June 30,
1999, we had an accumulated deficit of approximately $30.1 million. We intend to
continue to expend significant financial and management resources on the
development of additional services, sales and marketing, improved technology and
expanded operations. For example, we invested over $10 million to improve our
technology infrastructure so that we can offer our clients comprehensive
e-commerce outsourcing solutions. As a result of these expenditures, we expect
operating losses and negative cash flows to continue for the foreseeable future.
In addition, we anticipate our operating losses to increase significantly from
current levels. Our sales may not increase or even continue at their current
level, and we may not be profitable or generate cash from operations in future
periods.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
Our quarterly and annual operating results are likely to fluctuate
significantly in the future due to a variety of factors, many of which are
outside our control. Some of these factors include:
- our ability to attract and retain software and shareware publishers and
online retailers as clients;
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- our ability to attract and retain CommerceBridge clients;
- the introduction of new Web sites, Web stores, services or products by us
or by others;
- price competition and margin erosion;
- the rate at which the online market for the purchase of software and
shareware products continues to emerge;
- our ability to continue to upgrade and develop our systems and
infrastructure to meet emerging market needs and remain competitive in our
service offerings;
- termination of any account that represents a significant portion of our
sales;
- technical difficulties or system downtime;
- our ability to attract new personnel as needed as our business grows;
- our ability to increase the proportion of sales from online retailers,
which sales generally carry higher gross margins;
- the failure of Internet bandwidth to increase over time or any increase in
the cost of Internet bandwidth; and
- U.S. and foreign regulations relating to our business.
We also may offer favorable economic terms to certain software and shareware
publishers and online retailers in order to attract or retain their business,
which would reduce our gross margins. In addition, we may experience a decline
in sales in the month of December due to a potential reduction in the number of
hours business end-users spend online over the holidays. Due to these factors,
our annual or quarterly operating results may not meet the expectations of
securities analysts and investors. If this happens, the trading price of the
common stock would likely significantly decline.
A LOSS OF ANY CLIENT THAT ACCOUNTS FOR A LARGE PORTION OF OUR SALES COULD CAUSE
OUR REVENUES TO DECLINE
Sales initiated through the Web stores of three software publisher clients
collectively accounted for approximately 25% of our sales in 1998 and 20% of our
sales for the six months ended June 30, 1999. Contracts with these clients are
generally short term in nature. If any one of these contracts is not renewed or
otherwise ends, our revenues could decline and our business could be harmed.
OUR SALES CYCLE IS LENGTHY
We market our services directly to software and shareware publishers and
online retailers. These relationships are typically complex and take time to
finalize. Due to operating procedures in many large organizations, a significant
amount of time may pass between selection of our products and services by key
decision makers and the signing of a contract. As a result, the period between
the initial sales call and this signing of a contract with a software and
shareware publisher or online retailer with significant sales potential
typically ranges from six to twelve months, and can be longer. Therefore, the
timing of sales from these software publisher, shareware publisher and online
retailer clients is difficult to predict. Delays in signing contracts with
significant software and shareware publisher or online retailer clients could
harm our business.
THERE ARE A NUMBER OF RISKS ASSOCIATED WITH ELECTRONIC SOFTWARE DELIVERY, OR
ESD, INCLUDING THE MARKET'S POTENTIAL FAILURE TO ACCEPT ESD
Our success will depend in large part on growth in end-user acceptance of
ESD as a method of distributing software products. ESD is a relatively new
method of distributing software products and the
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growth and market acceptance of ESD is highly uncertain and subject to a number
of risks. Factors that will influence market acceptance of ESD include:
- the availability of sufficient bandwidth to enable purchasers to rapidly
download software products;
- the cost of time-based Internet access;
- the number of software products that are available for purchase through
ESD as compared to those available through physical delivery; and
- the level of end-user comfort with the process of downloading software via
the Internet, including the ease of use and lack of concern about
transaction security.
If ESD does not achieve widespread market acceptance, our business will be
harmed. Even if ESD achieves widespread acceptance, we cannot be certain that we
will overcome the substantial existing and future technical challenges
associated with electronically delivering software reliably and consistently on
a long-term basis. Our failure to do so would harm our business.
WE ARE DEPENDENT ON THE CONTINUED GROWTH OF ELECTRONIC COMMERCE AND DEVELOPMENT
OF THE INTERNET INFRASTRUCTURE
Sales of software products using the Internet do not currently represent a
significant portion of overall software sales. We depend on the growing use and
acceptance of the Internet as an effective medium of commerce by end-users.
Rapid growth in the use of and interest in the Internet and other online
services is a recent development. No one can be certain that acceptance and use
of the Internet and other online services will continue to develop or that a
sufficiently broad base of consumers will adopt, and continue to use, the
Internet and other online services as a medium of commerce. We rely on
purchasers of software who have historically used traditional means of commerce
to purchase software products. If we are to be successful, these software
purchasers must accept and use the Internet as a means of purchasing software
and exchanging information and we cannot predict the rate at which purchasers
will do so.
The Internet may fail as a commercial marketplace for a number of reasons,
including potentially inadequate development of the necessary network
infrastructure or delayed development of enabling technologies and performance
improvements. If the number of Internet users or their use of Internet resources
continues to grow, it may overwhelm the existing Internet infrastructure. Delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity or increased governmental regulation could
also have a similar effect. In addition, growth in Internet usage which is not
matched by comparable growth in the infrastructure supporting Internet usage
could result in slower response times or impair usage of the Internet.
WE ARE DEPENDENT ON SOFTWARE AND SHAREWARE PUBLISHERS
We are entirely dependent upon the software and shareware publishers that
supply us with software and shareware, and the availability of this software and
shareware is unpredictable. Our contracts with our software and shareware
publisher clients are generally one year in duration, with an automatic renewal
provision for additional one-year periods, unless we are provided with a written
notice at least 90 days before the end of the contract. As is common in our
industry, we have no long-term or exclusive contracts or arrangements with any
software and shareware publishers that guarantee the availability of software
and shareware products. We cannot be certain that the software and shareware
publishers that currently supply software and shareware to us will continue to
do so or that we will be able to establish new relationships with software and
shareware publishers. If we cannot develop and maintain satisfactory
relationships with software and shareware publishers on acceptable commercial
terms, if we are unable to obtain sufficient quantities of software and
shareware, if the
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quality of service provided by such software and shareware publishers falls
below a satisfactory standard or if software and shareware returned to us
exceeds our clients' expectations, our business could be harmed.
WE ARE DEPENDENT ON ONLINE RETAILERS
Our strategy is dependent upon increasing our sales of software products
through online retailers. We have historically generated substantially all of
our sales from the sale of software to end-users that were initiated through the
Web stores of our software publisher clients. In 1998 and the six months ended
June 30, 1999, less than 8% of our sales were generated through the Web stores
of our online retailer clients. We do not know if we will be successful in
establishing relationships with additional online retailers or if our current
relationships will continue. If we are unable to expand our relationships with
online retailers, we will likely be unable to continue to grow our business and
establish meaningful market share.
WE MAY BE UNABLE TO SUCCESSFULLY IMPLEMENT OUR DEVELOPMENT AND ACQUISITION
STRATEGY
To extend our e-commerce outsourcing capabilities, we have developed, and
intend to continue developing, our CommerceBridge services. We have also
acquired, and intend to continue acquiring, companies that provide outsourcing
services to shareware publishers. These business initiatives require a
significant expenditure of management time and sales, marketing and product
development funds. These expenditures may disrupt our ongoing business, distract
management and make it difficult to maintain standards, controls and procedures.
If we make acquisitions outside of our core business, assimilating the acquired
technology, services or products into our operations could be difficult. If we
are unable to successfully implement our new business initiatives, we will not
generate a profitable return on our investment and we will be unable to gain
meaningful market share. If a significant number of clients of the acquired
companies cease doing business with us, our business will suffer.
SYSTEM FAILURES COULD REDUCE THE ATTRACTIVENESS OF OUR PRODUCT AND SERVICE
OFFERINGS
We provide commerce, marketing and delivery services to software and
shareware publishers, online retailers and end-users through our CNS
transaction-processing and client management systems. These systems also
maintain an electronic inventory of products and gather consumer marketing
information. The satisfactory performance, reliability and availability of the
CNS and the underlying network infrastructure are critical to our operations,
our level of customer service, and our reputation and ability to attract and
retain clients. Our systems and operations are vulnerable to damage or
interruption from:
- fire, flood and other natural disasters; and
- power loss, telecommunications failure, break-ins and similar events.
We presently have no offsite back-up facilities and do not carry sufficient
business interruption insurance to fully compensate us for losses that may
occur. Despite the use of network security devices, our servers are vulnerable
to computer viruses, physical or electronic break-ins and similar disruptions,
which could lead to interruptions, delays, loss of data or the inability to
accept and fulfill end-user orders. Any systems interruption that impairs our
ability to accept and fill customer orders reduces the attractiveness of our
product and service offerings to software and shareware publishers, online
retailers and end-users, which could harm our business.
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FAILURE TO DEVELOP OUR TECHNOLOGY TO ACCOMMODATE INCREASED CNS TRAFFIC COULD
REDUCE DEMAND FOR OUR SERVICES
We have experienced periodic interruptions, affecting all or a portion of
our systems, which we believe will continue to occur from time to time. We
periodically enhance and expand our technology and transaction-processing
systems, and network infrastructure and other technologies to accommodate
increases in the volume of traffic on the CNS. We may not be successful in our
efforts to improve and increase the capacity of our network infrastructure. We
may not be able to anticipate increases, if any, in the use of the CNS or to
expand and upgrade its systems and infrastructure to accommodate such increases.
Our inability to add software and hardware or to develop and upgrade existing
technology, transaction-processing systems or network infrastructure to handle
increased traffic on the CNS may cause unanticipated system disruptions, slower
response times and poor customer service, including problems filling customer
orders, any of which could harm our business. In addition, additional network
capacity may not be available from third-party suppliers when we need it. Our
network and our suppliers' networks may be unable to maintain an acceptable data
transmission capability, especially if demands on the CNS increase. Our failure
to maintain an acceptable data transmission capability could significantly
reduce demand for our services, which would impair our business.
SECURITY BREACHES COULD HINDER OUR ABILITY TO SECURELY TRANSMIT CONFIDENTIAL
INFORMATION
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary for secure transmission of
confidential information, such as customer credit card numbers. A party who is
able to circumvent our security measures could misappropriate proprietary
information or interrupt our operations. Any such compromise or elimination of
our security could harm our business.
We may be required to expend significant capital and other resources to
protect against such security breaches or to address problems caused by such
breaches. Concerns over the security of the Internet and other online
transactions and the privacy of users may also inhibit the growth of the
Internet and other online services generally, and the Web in particular,
especially as a means of conducting commercial transactions. To the extent that
activities of the Company or third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent such security breaches could cause our
business to suffer.
CURRENT AND POTENTIAL COMPETITORS COULD REDUCE OUR OPERATING MARGINS AND MARKET
SHARE
The electronic commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future, particularly in
the area of electronic sale and distribution of software products. We currently
compete directly with other providers of electronic commerce solutions,
including CyberSource Corporation, NetSales Inc., Preview Systems, Inc.,
ReleaseNow.com Corporation and ShopNow.com, Inc. We compete indirectly with
software companies that offer tools and services for electronic commerce,
including companies that provide a broad range of Internet and server solutions
such as Microsoft Corporation and Netscape Communications Corporation. We also
compete indirectly with a large number of companies that provide tools and
services enabling one or more of the transaction processing functions of
electronic commerce, such as transaction control, data security, customer
interaction and database marketing. Our CommerceBridge service competes with the
in-house development efforts of companies engaged in e-commerce, as well as
e-commerce software and service providers such as Broadvision Inc., Intershop
Communications, Inc., InterWorld Corporation and Open Market Inc. In the area of
electronic sale and distribution of shareware products, we compete directly with
Wintronix, Inc. (doing business as RegNet) and Kagi.
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In addition, we compete with companies that use their own systems to sell
and distribute software products via the Internet, including Amazon.com, Inc.,
beyond.com Corporation, Ingram Micro Inc. and Tech Data Corporation. We also
compete with companies such as AltaVista (a division of Compaq Computer
Corporation), America Online, Inc., Excite@Home, Infoseek Corporation, Lycos,
Inc. and Yahoo! Inc., which specialize in electronic commerce or derive a
substantial portion of their revenues from electronic commerce and may
themselves offer, or provide means for others to offer, software products.
We believe that the principal competitive factors in our market include:
- breadth of service and product offerings;
- software and shareware publisher and online retailer relationships;
- brand recognition;
- system reliability and capacity;
- price;
- customer service;
- speed, accessibility and ease of use;
- speed to market;
- scaleability;
- convenience; and
- speed of fulfillment.
The online retailers and the other companies listed above may compete
directly with us by adopting a similar business model. Moreover, while some of
these companies are also clients or potential clients of ours, they may compete
with our electronic commerce outsourcing solution if they develop electronic
commerce systems or acquire such systems from other software and shareware
vendors or service providers.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than do we. In addition,
larger, well-established and well-financed entities may acquire, invest in or
form joint ventures with online competitors as the use of the Internet and other
online services increases. In addition, new technologies and the expansion of
existing technologies, such as price comparison programs that select specific
titles from a variety of Web sites, may direct end-users to online retailers
that compete with us, which would increase competitive pressures on us.
Increased competition may result in reduced operating margins, as well as a loss
of market share. Further, in response to changes in the competitive environment,
we may from time to time make pricing, service or marketing decisions or
acquisitions that could harm our business. We may not be able to compete
successfully against current and future competitors, and any inability to do so
could harm our business.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE IN ORDER TO SUCCEED
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of the CNS and the underlying network
infrastructure. The Internet and the electronic commerce industry are
characterized by rapid technological change, changes in user requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render our technology and systems obsolete. Our success will depend, in
part, on our ability to both license and internally develop leading
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technologies to enhance our existing services, develop new products, services
and technologies that address the increasingly sophisticated and varied needs of
our clients, and respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis. The development of
the CNS technology and other proprietary technology involves significant
technical and business risks. We may fail to use new technologies effectively or
adapt our proprietary technology and systems to customer requirements or
emerging industry standards. If we are unable to adapt to changing market
conditions, client requirements or emerging industry standards, our business
could be harmed.
WE MUST EFFECTIVELY MANAGE OUR RAPID GROWTH IN ORDER TO SUCCEED
We have rapidly and significantly expanded our operations and anticipate
that further significant expansion will be required to address potential growth
in our client base and market opportunities. From January 1, 1998 to June 30,
1999, we increased our number of employees from 45 to 224. This expansion is
placing a significant strain on our managerial, operational and financial
resources. Most of our existing senior management personnel joined us within the
last 24 months, including our President, who joined us in July 1998, our Chief
Financial Officer, who joined us in April 1998, and our Vice President of Sales,
who joined us in February 1999. Joel A. Ronning, our Chief Executive Officer,
also serves as the Chairman of the Board of Tech Squared Inc., one of our
principal stockholders. Our new employees include a number of key managerial,
technical and operations personnel who we have not yet fully integrated. We
recently acquired three shareware businesses that required us to integrate into
our systems two new offices and a number of new employees. We expect to add
additional key personnel in the near future, including direct sales and
marketing personnel. To manage the expected growth of our operations and
personnel, we will be required to:
- improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
- install new management information systems; and
- train, motivate and manage our employees.
We may not be able to install management information and control systems in
an efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future operations. In
addition, we may not be able to hire, train, retain, motivate and manage
required personnel or to successfully identify, manage and exploit existing and
potential market opportunities. If we are unable to manage growth effectively,
our business will be harmed.
OUR CHIEF EXECUTIVE OFFICER IS CRITICAL TO OUR BUSINESS AND HE MAY NOT REMAIN
WITH US IN THE FUTURE
Our future success significantly depends on the continued services and
performance of our senior management, particularly Joel A. Ronning, our Chief
Executive Officer. Our performance also depends on our ability to retain and
motivate our other executive officers and key employees. The loss of the
services of any of our executive officers or other key employees could harm our
business. We have long-term employment agreements only with Mr. Ronning and
Perry W. Steiner, our President. See "Management--Employee Agreements." We only
maintain a "key person" life insurance policy on Mr. Ronning. Our future success
also depends on our ability to identify, attract, hire, train, retain and
motivate other highly skilled technical, managerial, operations, merchandising,
sales and marketing and customer service personnel. Competition for such
personnel is intense, and we may be unable to successfully attract, assimilate
or retain sufficiently qualified personnel. The failure to retain and attract
the necessary personnel could harm our business.
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PROTECTING OUR INTELLECTUAL PROPERTY IS CRITICAL TO OUR SUCCESS
Trademarks, patents, copyrights, trade secrets and other intellectual
property are critical to our success, and we rely on trademark, trade secret
protection and confidentiality and/or license agreements with our employees,
clients, partners and others to protect our proprietary rights. We seek to
protect our proprietary position by, among other methods, filing United States
and foreign patent applications related to our proprietary technology,
inventions and improvements that are important to the development of our
business. Proprietary rights relating to our technologies will be protected from
unauthorized use by third parties only to the extent that they are covered by
valid and enforceable patents or copyrights or are effectively maintained as
trade secrets. In addition, the laws of some foreign countries do not protect
our intellectual property rights to the same extent as do the laws of the United
States. The patent position of high technology companies involves complex legal
and factual questions and, therefore, we cannot predict their validity and
enforceability with certainty. Even if issued, our patent applications may be
challenged, invalidated, held unenforceable or circumvented. Further, rights
granted under future patents may not provide us with proprietary protection or
competitive advantages against competitors with similar technology. Others may
independently develop similar technologies or duplicate technologies developed
by us.
We have one registered trademark for "Digital River." Effective trademark
and trade secret protection may not be available in every country in which our
products and services are made available online. The steps we have taken to
protect our proprietary rights may not be adequate, and third parties may
infringe or misappropriate our trade secrets, trademarks, trade dress and
similar proprietary rights. In addition, others may independently develop
substantially equivalent intellectual property. Any significant failure to
protect our intellectual property in a meaningful manner could harm our
business. In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of management and technical resources,
which could harm our business.
CLAIMS OF INFRINGEMENT OF OTHER PARTIES' INTELLECTUAL PROPERTY RIGHTS COULD
REQUIRE US TO EXPEND SIGNIFICANT RESOURCES
From time to time we may receive notice of claims of infringement of other
parties' proprietary rights. Any future assertions or prosecutions of claims
like these could require us to expend significant financial and managerial
resources. Defending any claim, whether valid or not, could be time-consuming,
result in costly litigation and diversion of technical and management personnel,
cause product shipment delays or require us to develop non-infringing technology
or enter into royalty or licensing agreements. Royalty or licensing agreements,
if required, may not be available on terms acceptable to us, or at all. If a
third party succeeds in any infringement action against us and we fail or are
unable to develop non-infringing technology or license the infringed or similar
technology on a timely basis, our business could be harmed.
CLAIMS AGAINST US RELATED TO THE SOFTWARE PRODUCTS THAT WE DELIVER
ELECTRONICALLY COULD ALSO REQUIRE US TO EXPEND SIGNIFICANT RESOURCES
Claims may be made against us for negligence, copyright or trademark
infringement or other theories based on the nature and content of software
products that are delivered electronically and subsequently distributed to
others. Although we carry general liability insurance, our insurance may not
cover potential claims of this type or may not be adequate to cover all costs
incurred in defense of potential claims or to indemnify us for all liability
that may be imposed. Any costs or imposition of liability that is not covered by
insurance or in excess of insurance coverage could harm our business.
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<PAGE>
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO ACHIEVE OUR BUSINESS OBJECTIVES
We require substantial working capital to fund our business. We have had
significant operating losses and negative cash flow from operations since
inception and expect to continue to do so for the foreseeable future. We believe
that our existing capital resources will be sufficient to meet our capital
requirements for at least the next eighteen months. However, our capital
requirements depend on several factors, including the rate of market acceptance
of our products, the ability to expand our client base, the growth of sales and
marketing and other factors. If capital requirements vary materially from those
currently planned, we may require additional financing sooner than anticipated.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution, or these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock.
Additional financing may not be available when needed on terms favorable to us
or at all. If adequate funds are not available or are not available on
acceptable terms, we maybe unable to develop or enhance our services, take
advantage of future opportunities or respond to competitive pressures, which
could harm our business.
CHANGES IN GOVERNMENT REGULATION COULD LIMIT OUR INTERNET ACTIVITIES OR RESULT
IN ADDITIONAL COSTS OF DOING BUSINESS OVER THE INTERNET
We are not currently subject to direct regulation by any domestic or foreign
governmental agency, other than regulations applicable to businesses generally,
export control laws and laws or regulations directly applicable to electronic
commerce. However, due to the increasing popularity and use of the Internet, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet covering issues such as:
- user privacy;
- pricing;
- content;
- copyrights;
- distribution; and
- characteristics and quality of products and services.
Furthermore, the growth and development of the market for electronic
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of additional laws or regulations may decrease the growth of the
Internet or other online services, which could, in turn, decrease the demand for
our products and services and increase our cost of doing business, or otherwise
harm our business.
The applicability of existing laws governing issues such as property
ownership, copyrights, encryption and other intellectual property issues,
taxation, libel, export or import matters, obscenity and personal privacy to the
Internet is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes to the laws intended to address these issues, including
some recently proposed changes, could create uncertainty in the Internet
marketplace. Uncertainty could reduce demand for our services or increase the
cost of doing business due to increased costs of litigation or increased service
delivery costs.
In addition, as our services are available over the Internet in multiple
states and foreign countries, these jurisdictions may claim that we are required
to qualify to do business as a foreign corporation in each state or foreign
country. We are qualified to do business only in Connecticut, Minnesota and
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Washington. Failure to qualify as a foreign corporation in a jurisdiction where
we are required to do so could subject us to taxes and penalties and could
result in our inability to enforce contracts in these jurisdictions. New
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other
electronic services could harm our business.
WE MAY NOT SUCCEED IN DEVELOPING A SUCCESSFUL INTERNATIONAL PRESENCE
Although we sell software products and services to end-users outside the
United States, we might not succeed in expanding our international presence.
Conducting business outside of the United States is subject to certain risks,
including:
- changes in regulatory requirements and tariffs;
- reduced protection of intellectual property rights;
- difficulties in distribution;
- the burden of complying with a variety of foreign laws; and
- political or economic constraints on international trade or instability.
In addition, some software exports from the United States are subject to
export restrictions as a result of the encryption technology in the software and
we may become liable to the extent we violate these restrictions. We might not
successfully market, sell and distribute our products and services in local
markets and we cannot be certain that one or more of these factors will not harm
our future international operations, and consequently, our business.
NEW OBLIGATIONS TO COLLECT OR PAY SALES TAX COULD HARM OUR BUSINESS
We do not currently collect sales, use or other similar taxes with respect
to ESD or shipments of software and shareware products into states other than
Connecticut, Minnesota and Washington. However, one or more local, state or
foreign jurisdictions may seek to impose sales or use tax collection obligations
on out of state companies like ours that engage in electronic commerce. Any new
operation in states outside Connecticut, Minnesota and Washington could subject
shipments into those states to state sales or use taxes under current or future
laws. In addition, any failure by a CommerceBridge client to collect obligatory
sales or use taxes could cause the relevant jurisdiction to attempt imposing
that obligation on us. A successful assertion by one or more states or any
foreign country that we should collect sales, use or other taxes on the sale of
merchandise through ESD or CommerceBridge or shipments of software could harm
our business.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE DUE TO BROAD MARKET AND INDUSTRY
FACTORS BEYOND OUR CONTROL
The trading price of our common stock has been and is likely to continue to
be highly volatile and could be subject to wide fluctuations in response to
factors such as:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services that we or our competitors offer;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online commerce industries;
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- changes in the economic performance and/or market valuations of other
Internet, online service industries;
- changes in the economic performance and/or market valuations of other
Internet, online service or retail companies;
- our announcements of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market and
the market for Internet-related and technology companies in particular, has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of these companies. The trading
prices of many technology companies' stocks are at or near historical highs and
these trading prices and multiples are substantially above historical levels.
These trading prices and multiples may not be sustained. These broad market and
industry factors may materially adversely affect the market price of our common
stock, regardless of our actual operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such companies. Such
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which would harm our business.
PROVISIONS OF OUR CHARTER DOCUMENTS, OTHER AGREEMENTS AND DELAWARE LAW MAY
INHIBIT POTENTIAL ACQUISITION BIDS FOR US
Certain provisions of our Amended and Restated Certificate of Incorporation,
Bylaws, other agreements and Delaware law could make it more difficult for a
third party to acquire us, even if a change in control would be beneficial to
our stockholders.
YEAR 2000 PROBLEMS WITH OUR INTERNAL SYSTEMS AND THIRD-PARTY SYSTEMS OF
SUPPLIERS COULD CREATE SIGNIFICANT POTENTIAL LIABILITY FOR US AND REQUIRE US TO
EXPEND SUBSTANTIAL MANAGEMENT AND FINANCIAL RESOURCES
Like many other companies, Year 2000 computer issues create risks for us. If
our internal management information systems and external electronic commerce
information systems do not correctly recognize the process date information
beyond the year 1999, there could be an adverse impact on our operations. To
address potential Year 2000 issues with our internal and external systems, we
have evaluated these systems. We believe we have completed all activities to
remediate year 2000 issues, although we will continue testing throughout the
year. These activities are intended to encompass all of our major systems,
including electronic commerce, sales processing, sales and financial systems.
The costs incurred to date related to these programs have been less than
$25,000. The total cost does not include potential costs related to any customer
or other claims or the cost of internal software and hardware replaced in the
normal course of business. The total cost is subject to change should events
arise that indicate a Year 2000 issue.
We are also working with key suppliers of products and services to determine
that their operations and products are Year 2000 compliant or to monitor their
progress toward Year 2000 Compliance, as appropriate. The failure of a major
supplier to become Year 2000 Compliant on a timely basis, or a conversion that
is incompatible with our systems could harm our business. In addition, our
business
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<PAGE>
may be harmed if our end-users are unable to use their credit cards due to the
Year 2000 issues that are not rectified by their credit card vendors.
In addition, we have begun internal discussions concerning contingency
planning to address potential problem areas with internal systems and with
suppliers and other third parties. We expect assessment, remediation and
contingency planning activities to be on-going throughout calendar year 1999
with the goal of appropriately resolving all material internal and external
systems and third party issues.
We deem "Year 2000 Compliant" to mean software that can individually, and in
combination and conjunction with all other systems, products or processes with
which they are required or designed to interface, continue to be used normally
and to operate successfully (both in functionality and performance in all
material respects) over the transition into the twenty first century when used
in accordance with the documentation relating to such software, including being
able to, before, on and after January 1, 2000 substantially conform to the
following:
- use logic pertaining to dates which allow users to identify and/or use the
century portion of any date fields without special processing;
- respond to all date elements and date input to resolve any ambiguity as to
century in a disclosed, defined and pre-determined manner; and
- provide date information in ways which are unambiguous as to century.
This may be achieved by permitting or requiring the century to be specified
or where the data element is represented without a century, the correct century
is unambiguous for all manipulations involving that element. Based on currently
available information, we do not believe that the Year 2000 matters discussed
above related to internal systems or products sold to customers will have a
material adverse impact on our financial condition or overall trends in results
of operations; however, it is still uncertain to what extent we may be affected
by these matters. In addition, customers may delay purchase decisions because of
uncertainty about Year 2000 issues. The failure to ensure Year 2000 Compliance
by a supplier or another third party could harm our business.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling stockholders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
intend to retain any future earnings to support operations and to finance the
growth and development of our business and we do not anticipate paying cash
dividends for the foreseeable future.
WHERE YOU CAN GET MORE INFORMATION
We are a reporting company and file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read and copy these
reports, proxy statements and other information at the SEC's public reference
rooms at Room 1024, 450 Fifth Street, N.W., Washington, D.C., as well as at the
SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and 7 World Trade Center, Suite 1300, New York, NY 10048. You can request
copies of these documents by writing to the SEC and paying a fee for the copying
cost. Please call the SEC at 1-800-SEC-0330 for more information about the
operation of the public reference rooms. Our SEC filings are also available at
the SEC's web site at "http://www.sec.gov." In addition, you can read and
15
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copy our SEC filings at the office of the National Association of Securities
Dealers, Inc. at 1735 "K" Street, Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings we will make with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:
- Annual Report on Form 10-K for the year ended December 31, 1998;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, filed
May 14, 1999;
- Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed
August 11, 1999; and
- Current Report on Form 8-K filed April 16, 1999;
- Current Report on Form 8-K filed July 16, 1999; and
- The description of the common stock contained in our Registration
Statement on Form 8-A, as filed on July 20, 1998 with the SEC.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Digital River, Inc.
9625 W. 76th Street, Suite 150
Eden Prairie, MN 55344
(612) 253-1234
This prospectus is part of a Registration Statement we filed with the SEC.
You should rely only on the information incorporated by reference or provided in
this prospectus and the Registration Statement. We have authorized no one to
provide you with different information. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front of the document.
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<PAGE>
SELLING STOCKHOLDERS
In different stock and asset acquisition transactions that we consummated in
the first six months of 1999, we issued to some of the selling stockholders
common stock and agreed to register a number of shares of the common stock for
resale. We also agreed to use our commercially reasonable efforts to keep the
Registration Statement effective for 90 days. Our registration of the shares of
common stock does not necessarily mean that the selling stockholders will sell
all or any of the shares.
The following table sets forth certain information regarding the beneficial
ownership of the common stock, as of October 30, 1999, by each of the selling
stockholders.
The information provided in the table below with respect to each selling
stockholder has been obtained from that selling stockholder. Except as otherwise
disclosed below, none of the selling stockholders has, or within the past three
years has had, any position, office or other material relationship with us.
Because the selling stockholders may sell all or some portion of the shares of
common stock beneficially owned by them, we cannot estimate the number of shares
of common stock that will be beneficially owned by the selling stockholders
after this offering. In addition, the selling stockholders may have sold,
transferred or otherwise disposed of, or may sell, transfer or otherwise dispose
of, at any time or from time to time since the date on which they provided the
information regarding the shares of common stock beneficially owned by them, all
or a portion of the shares of common stock beneficially owned by them in
transactions exempt from the registration requirements of the Securities Act of
1933.
Beneficial ownership is determined in accordance with
Rule 13d-3(d) promulgated by the Commission under the Securities Exchange Act of
1934. Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to shares, subject to community
property laws where applicable. Applicable percentages are based on 21,599,358
shares outstanding on October 30, 1999, adjusted as required by
rules promulgated by the SEC.
SHARES BENEFICIALLY OWNED PRIOR TO OFFERING
<TABLE>
<CAPTION>
SELLING STOCKHOLDER NUMBER PERCENT SHARES BEING OFFERED
- ------------------- -------- -------- --------------------
<S> <C> <C> <C>
Public Software Library Ltd............................... 161,842 * 137,566
Cyrus Maaghul............................................. 98,203 * 79,928
Charles G. Rose, IV....................................... 78,153 * 78,153
Benjamin F. Reser......................................... 61,479 * 61,479
Meiman Kentjana........................................... 54,877 * 25,057
CNET...................................................... 7,672 * 7,672
Ted West.................................................. 3,887 * 3,887
Ryan Dewell............................................... 1,125 * 1,125
Jessica Schnepp........................................... 1,125 * 1,125
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
common stock
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<PAGE>
PLAN OF DISTRIBUTION
The shares of common stock may be sold from time to time by the selling
stockholders in one or more transactions at fixed prices, at market prices at
the time of sale, at varying prices determined at the time of sale or at
negotiated prices. As used in this prospectus, "selling stockholders" includes
donees, pledgees, transferees and other successors in interest selling shares
received from a selling stockholder after the date of this prospectus as a gift,
pledge, partnership distribution or other non-sale transfer. Upon Digital River
being notified by a selling stockholder that a donee, pledgee, transferee or
other successor in interest intends to sell more than 500 shares, a supplement
to this prospectus will be filed. The selling stockholders may offer their
shares of common stock in one or more of the following transactions:
- on any national securities exchange or quotation service on which the
common stock may be listed or quoted at the time of sale, including the
Nasdaq National Market,
- in the over-the-counter market,
- in private transactions,
- through options,
- by pledge to secure debts and other obligations, or
- a combination of any of the above transactions.
If required, we will distribute a supplement to this prospectus to describe
material changes in the terms of the offering.
The shares of common stock described in this prospectus may be sold from
time to time directly by the selling stockholders. Alternatively, the selling
stockholders may from time to time offer shares of common stock to or through
underwriters, broker/dealers or agents. The selling stockholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933. Any profits on the resale of shares of common
stock and any compensation received by any underwriter, broker/dealer or agent
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933.
Any shares covered by this prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act of 1933 may be sold under Rule 144 rather than
pursuant to this prospectus. The selling stockholders may not sell all of the
shares they hold or may acquire upon exercise of the warrants. The selling
stockholders may transfer, devise or gift such shares by other means not
described in this prospectus.
To comply with the securities laws of certain jurisdictions the common stock
must be offered or sold only through registered or licensed brokers or dealers.
In addition, in certain jurisdictions, the common stock may not be offered or
sold unless they have been registered or qualified for sale or an exemption is
available and complied with.
Under the Securities Exchange Act of 1934, any person engaged in a
distribution of the common stock may not simultaneously engage in market-making
activities with respect to the common stock for five business days prior to the
start of the distribution. In addition, each selling stockholder and any other
person participating in a distribution will be subject to the Securities
Exchange Act of 1934 which may limit the timing of purchases and sales of common
stock by the selling stockholders or any such other person. These factors may
affect the marketability of the common stock and the ability of brokers or
dealers to engage in market-making activities.
All expenses of this registration, estimated at approximately $30,000, will
be paid by us. These expenses include the SEC's filing fees and fees under state
securities or "blue sky" laws.
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LEGAL MATTERS
For the purpose of this offering, Cooley Godward LLP, San Francisco,
California, is giving an opinion as to the validity of the common stock offered
by this prospectus. As of the date of this prospectus, a member of Cooley
Godward LLP beneficially owns 500 shares of the Company's common stock.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years ended December 31, 1998 incorporated by reference in this
prospectus and elsewhere in the registration statement 1998 have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
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We have not authorized any dealer, sales person or other person to give any
information or to make any representations other than those contained in this
prospectus or any prospectus supplement. You must not rely on any unauthorized
information. This prospectus is not an offer of these securities in any state
where an offer is not permitted. The information in this prospectus is current
as of November 5, 1999. You should not assume that this prospectus is accurate
as of any other date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 2
Risk Factors.......................... 4
Use of Proceeds....................... 15
Dividend Policy....................... 15
Where You Can Find More Information... 15
Selling Stockholders.................. 17
Plan of Distribution.................. 18
Legal Matters......................... 19
Experts............................... 19
</TABLE>
395,992 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
DIGITAL RIVER, INC.
NOVEMBER 5, 1999
<PAGE>
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